In re Yellow Poplar Lumber Co.

• Decision Date: 15 July 2019
• Docket Number: CASE NO. 17-70882
• Citation: 605 B.R. 416
• Parties: IN RE: YELLOW POPLAR LUMBER COMPANY, INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Virginia

605 B.R. 416

IN RE: YELLOW POPLAR LUMBER COMPANY, INC., Debtor.

CASE NO. 17-70882

United States Bankruptcy Court, W.D. Virginia.

Signed July 15, 2019

Yellow Poplar Lumber Company, Inc., pro se.

John M. Lamie, Browning Lamie & Gifford, Abingdon, VA, for Trustee.

MEMORANDUM OPINION

Paul M. Black, UNITED STATES BANKRUPTCY JUDGE

This is a case proceeding under Chapter VII of the Bankruptcy Act of 1898, as amended. 11 U.S.C. § 1 et seq. This matter comes before the Court on the Motion to Approve Attorney Fees Pursuant to the Common Fund Theory ("Motion") (ECF No. 85) filed by counsel for the heirs of two creditors in this case, Daniel von Bremen and Willie Johnson, ("Counsel") and a response filed thereto by the Chapter 7 Trustee (the "Trustee") (ECF No. 92). Counsel seeks payment by unrepresented unsecured creditors in this case of a fee enhancement of $164,164.90 pursuant to the common fund theory. (ECF No. 85.)¹ The Court held a hearing on this matter on May 2, 2019 and has reviewed supplemental memoranda from Counsel and the Trustee.

FACTUAL BACKGROUND

On July 17, 1928, White Oak Lumber Company filed an involuntary Chapter 7 petition in the United States District Court for the Western District of South Carolina to have Yellow Poplar Lumber Company, Inc. ("Yellow Poplar") adjudged a bankrupt. The court adjudged Yellow Poplar a bankrupt and closed the case in 1931. In 2013, the United States District Court for the District of South Carolina reopened and transferred the case to the District Court for the Western District of Virginia after a dispute involving Yellow Poplar arose as to the ownership rights of gas estates on parcels of land located in Virginia. The parties ultimately agreed to a settlement of the ownership rights, pursuant to which Yellow Poplar stood to receive approximately $2 million in gas royalties. In light of Yellow Poplar's prior bankruptcy, the district court referred the matter to this Court for administration.

Since the case's resurrection, the Trustee has, with the aid of a genealogist, identified many of the original claimants and their existing heirs or successors in interest. Accordingly, the Court ordered the Trustee, and any other party who wished, to submit a memorandum addressing whether interest is payable to the creditors in any distribution made in this case and, if interest is appropriate, what rate should be used. Pursuant to that Order, the Trustee filed a proposed distribution to unsecured creditors with interest at a rate of 2.4%. On behalf of the von Bremen and Johnson heirs, Counsel objected to the rate of 2.4%, advocating instead for a higher rate of 7% based on the legal rate in South Carolina when the case was initiated. This Court awarded 3.6% interest. On appeal to the district court, however, Counsel successfully argued that unsecured creditors should receive interest at 7%, resulting in a significantly larger pool of assets to be distributed to general unsecured creditors.²

Upon resolution of the appeal to the district court, Counsel filed his Motion seeking a fee enhancement in the amount of $164,164.90 pursuant to the common fund doctrine. (ECF No. 85.) The Trustee has objected, suggesting that the common fund theory does not apply outside of class-action litigation or, specifically, under the Bankruptcy Act. (ECF No. 92.) Regardless, the Trustee argues that the circumstances of this case do not warrant such a substantial increase in fees or contribution from creditors benefitting from Counsel's work. (ECF No. 98.) In their pleadings, the parties largely focus on the issue of whether the common fund doctrine applies in bankruptcy cases and to what extent counsel should recover, if at all. However, the determinative question in this case is not whether the common fund theory applies, but whether the Court has authority to grant Counsel a fee enhancement from assets of the bankruptcy estate. Because no provision of either the Bankruptcy Act or its successor the Bankruptcy Code provides a method to award fees in this circumstance, the Court will deny Counsel's Motion.³

JURISDICTION

This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the referral made to this Court by Order from the District Court on June 28, 2017.

CONCLUSIONS OF LAW

The general rule in the United States is that every litigant must bear the expense of his own attorney's fees. Boeing Co. v. Van Gemert , 444 U.S. 472, 478, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980). However, the common fund doctrine "stands as a well-recognized exception to the general principle," allowing "a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client ... [to receive] a reasonable attorney's fee from the fund as a whole." Id. "It is founded upon the principle that when one who, while establishing his own claim, also establishes the means by which others may collect their claims, a chancellor in equity may award counsel fees to the trail blazer out of the property made available for the satisfaction of all claims." Gibbs v. Blackwelder , 346 F.2d 943, 945 (4th Cir. 1965). Writing for the Fourth Circuit, Judge Haynsworth eloquently stated that courts apply the doctrine "so that the one who led in hewing the path to victory is not left saddled with extensive attorney's fees, which need not be incurred by his more timid fellows who held back until the fruits of the pioneer's success were laid before them." Id. Rooted in principles of equity, "[t]he doctrine rests on the perception that persons who obtain the benefit of a lawsuit without contributing to its cost are unjustly enriched at the successful litigant's expense." Boeing , 444 U.S. at 478, 100 S.Ct. 745. Significantly, the common fund doctrine does not merely spread the cost of litigation among benefitting parties, but also allows an attorney to collect an extra award of fees. This is so even when the attorney is fulfilling the terms of the engagement with his own client. Vincent v. Hughes Air West, Inc. , 557 F.2d 759, 769–70 (9th Cir. 1977).

Whether a court may apply the doctrine to allow fee enhancements in bankruptcy proceedings is a point of disagreement between the parties here. Courts have advanced the concept to varying degrees since the Supreme Court originally acknowledged its existence in Trustees v. Greenough , 105 U.S. 527, 26 L.Ed. 1157 (1881). As Counsel noted in his supplemental brief, Greenough suggested that "the rule that a party who recovers a fund for the common benefit of creditors is entitled to have his costs and expenses paid out of the fund, prevails in bankruptcy cases." Id. at 534. The Supreme Court's comment, though, unfortunately provides little guidance as to when lower courts should apply the doctrine, especially considering Congress later enacted sweeping changes to bankruptcy laws with the passage of the Bankruptcy Act in 1898. Consequently, several courts have limited application of the common fund doctrine in bankruptcy matters—both in Act and Code cases—with some even suggesting that it has no application in bankruptcy cases at all. See, e.g. , Stickney Corp. v. Chi. Milwaukee Corp. (In re Chi., Milwaukee, St. Paul & Pac. R.R. Co.) , 840 F.2d 1308, 1318 n.9 (7th Cir. 1988) ("Although unnecessary to our decision, we also agree with the special master's recommendation that the ‘common-fund’ doctrine does not operate to authorize the payment of fees or costs from the bankruptcy estate ."); Guerin v. Weil, Gotshal & Manges , 205 F.2d 302 (2d Cir. 1953) ("The principle of the Greenough case ... is confined by the Act to the recovery of ‘reasonable costs and expenses’ where ‘the property of the bankrupt, transferred or concealed by him ... shall have been recovered for the benefit of the estate ... by the efforts and at the cost and expense of one or more creditors.’ "); In re Chewning & Frey Sec., Inc. , 328 B.R. 899, 919 (Bankr. N.D. Ga. 2005) ("[T]he common fund doctrine contravenes the purpose and spirit of the Bankruptcy Code, and is inconsistent with statutory distribution scheme articulated therein."); In re Maimone , 41 B.R. 974, 984 (Bankr. D.N.J. 1984) ("The court concludes that it would be inappropriate to apply the equitable fund doctrine to a complex and protracted bankruptcy proceeding in which many parties have at various times advanced many Motions, Complaints, and positions.... This doctrine would encourage intermeddling by parties having a slight contingent interest in a case in the hope that they might be permitted to recover attorneys' fees for the efforts. It is preferable, in the bankruptcy context, to have each party represent its own interests without such a distortion in incentives. Doubtless, the equitable fund doctrine may be applicable in an unusual case, but this is not such a case.").

Given this context, it is not surprising that Counsel spends the majority of his Motion attempting to persuade the Court that the common fund doctrine is, in fact, applicable to bankruptcy cases. To that end, Counsel cites numerous cases he suggests show that the Court may and should award him a fee enhancement. He is correct that many other courts have either granted fee applications under the common fund doctrine, or at least recognized the doctrine's utility in bankruptcy courts. See, e.g. , Paul, Johnson, Alston & Hunt v. Graulty , 886 F.2d 268 (9th Cir. 1989) (granting fees to counsel for the trustee); Gordon v. Internal Revenue Serv. (In re Johnson) , 593 B.R. 895 (Bankr. N.D. Ga. 2018) (recognizing a creditor's right to payment from estate funds for pre-petition litigation); Comm. of Creditors Holding Unsecured Claims v. Sable, Makoroff & Gusky, P.C. (In re Second Pa. Real Estate Corp.) , 192 B.R. 663 (Bankr. W.D. Pa. 1995) (awarding payment to counsel who negotiated a pre-petition settlement on behalf of the debtor); In re Farah , 141 B.R. 920 (Bankr. W.D. Tex. 1992) (granting a fee application for debtor's counsel in a...